Four Reasons Why I’m Getting Bullish On The Market… Part II
Last Monday, I began telling you about four reasons why I’m starting to feel more bullish about the market. If you missed the article, you can find it here – Four Reasons Why I’m Getting Bullish On The Market.
In that article, I discussed the first two reasons why I’m feeling more positive about the market.
First, Europe is finally getting a handle on their financial crisis.
After an all night summit in late June, EU leaders reached agreement on a number of issues that had been preventing the EU from effectively dealing with the crisis. If they follow through on these historic measures, it should help stabilize the region’s financial crisis.
Second, China’s leaders have shown they’re prepared to do whatever it takes to boost growth.
Since last November, the Chinese government has significantly eased monetary policy. They’ve reduced bank reserve requirements three times. And more recently, they lowered interest rates on two separate occasions.
What’s more, the Chinese government stands ready to stimulate economic growth more directly.
A couple of weeks ago, Prime Minister Wen Jiabao said China’s economic recovery has yet to build momentum. Most market experts are interpreting these comments to mean China’s preparing to inject hefty government spending into the economy. And the scuttlebutt is this spending will happen during the second half of 2012.
No question about it…
The recent developments in the EU and China are clearly bullish for the market. They go a long way toward relieving the two major fears keeping a lid on the market right now.
But there are two additional reasons why I’m feeling more positive about the market.
Reason #3: Consumer sentiment is at its weakest point for the year.
The University of Michigan recently released their consumer sentiment index for the month of July. And the results were very encouraging if you know how to interpret them. The index unexpectedly fell in July to 72 after rising to 73.2 in June.
According to Bloomberg, most economists were expecting an increase to 73.5.
While this appears to be bad news on its face, it’s actually a bullish sign for the market.
You see, the consumer sentiment index is a contrary indicator. A high reading (above 100) has historically coincided with market tops. And a low reading (below 70) has often occurred simultaneously with market bottoms.
This makes perfect sense.
After all, the index measures consumer attitudes toward the business climate, personal finance, and spending.
It stands to reason then that consumers will feel most optimistic when the economy is at its best… in other words, near its peak. And conversely, they’ll feel most pessimistic when the economy is at its worst… near a bottom.
Now, the index is still slightly above 70, so it isn’t flashing a bullish signal quite yet. But, it could easily slip under this critical level in the next couple of months. And if it does, it will be further evidence the market’s poised to move higher.
That brings us to the fourth and final reason why I’m getting bullish on the market…
Reason #4: The market usually posts solid gains in an election year.
According to Ned Davis Research, the stock market typically posts gains during an election year. It’s all part of what they call the presidential stock market cycle.
Here’s how it works in a nutshell…
In the first year of a presidential term, the market tends to post a gain of 5% on average. The second year is usually a little weaker with an average gain of 4%. The third year tends to be the best with a 12% average return. And the fourth year (the election year) is no slouch either with an average profit of 8%.
So, based on this data, we should see the market post gains of around 8% for all of 2012.
Now, by itself, this indicator is not that supportive of a bullish outlook for the second half. As I write, the S&P 500 Index is up nearly 7% for the year already.
But when considered in light of the other three factors I’ve mentioned, it clearly bodes well for the market’s second half performance.
Remember, the 8% gain noted by Ned Davis is the average return over a number of election years. In any given election year, the market’s return could be higher or lower than that average.
In my opinion, the improvements happening in Europe and China combined with negative consumer sentiment suggest we’ll see a bigger than average return in this election year.
Profitably Yours,
Robert Morris
Category: Stocks
